Aug 16, 2016 RBL BANK LIMITED. SMC Ranking. Competitive Strengths (3/5) Business Overview. Issue Highlights. Issue Composition

Transcription

1 RBL BANK LIMITED Aug 16, 2016 Business Overview SMC Ranking (3/5) Issue Highlights Industry Bank Total Issue (Shares) - Offer for sale 16,909,628 Total Issue (Shares) - Fresh Issue 48,888,889 Net Offer to the Public 65,798,517 Issue Size (Rs. Cr.) Price Band (Rs.) Offer Date 19-Aug-16 Close Date 23-Aug-16 Face Value 10 Lot Size 65 Equity Share Issue Composition Book Running Lead Manager Axis Bank Limited, ICICI Securities Ltd, Citi group, Global Markets, India P Ltd, HDFC Bank Ltd IDFC Securities Ltd, IIFL Holdings Ltd Kotak Mahindra Capital Company Ltd Morgan stanley India Company P ltd SBI Capital Markets Ltd. Name of the registrar Link Intime India Private Ltd Shareholding Pattern (%) In shares Offer for sale 16,909,628 Fresh issue 48,888,889 Total Issue for Sale 65,798,517 QIB 32,899,258 NIB 9,869,778 Retail 23,029,481 Particulars Pre-issue Post issue Promoters & promoters group 00.00% 00.00% QIB 34.38% 34.17% NIB 25.77% 25.77% Retail 39.85% 40.78% Total % % RBL Bank Limited is one of India's fastest growing private sector banks in the last six years. It offer a comprehensive range of banking products and services customized to cater to the needs of large corporations, small and medium enterprises ( SMEs ), agricultural customers, retail customers and development banking & financial inclusion (low income) customers. As of March 31, 2016, it had 197 interconnected branches and 362 interconnected ATMs spread across 16 Indian states and union territories serving approximately 1.90 million customers. As part of growth strategy, it acquired certain Indian businesses of the Royal Bank of Scotland ( RBS ), including RBS's business banking, credit card and mortgage portfolio businesses, in Fiscal This acquisition has added to existing businesses, enabling us to expand scale of operations and geographic presence. Competitive Strengths Strong shareholder and capital base: A strong capital base is a pre-requisite for growth in the banking industry. As of March 31, 2014, 2015 and 2016, its capital adequacy ratio was, 14.64% (Basel III), 13.13% (Basel III) and 12.94% (Basel III), respectively. As of March 31, 2016, its capital adequacy ratio was 12.94% (of which Tier 1 was 11.10%) and the bank is comfortably met the capital requirements under the Basel III Requirements as per the RBI's new capital adequacy guidelines, which came into effect on April 1, Financial Strength: The bank has been able to maintain asset quality amidst challenging macro environment. The management of the bank believes that asset quality numbers are within the best in the industry. Its gross NPAs stood at 0.77% and 0.98% as of March 31, 2015 and March 31, 2016, respectively, and net NPAs stood at 0.27% and 0.59% as of March 31, 2015 and March 31, 2016, respectively. RBL restructured loans (defined as standard restructured assets) as a percentage of net advances stood at 0.55% and 0.09% as of March 31, 2015 and March 31, 2016, respectively. Its provision coverage ratio stood at 68.28% and 55.87% as of March 31, 2015 and March 31, 2016, respectively. Its deposits grew from Rs.2, crore at the end of fiscal 2011 to 24, crore at the end of fiscal 2016, which represents a CAGR of 70.10% for the past five fiscal years and its advances grew from Rs.1, crore at the end of fiscal 2011 to Rs. 21,229.0 crore at the end of fiscal 2016, which represents a CAGR of 65.95% for the past five fiscal years. Client focused approach to business resulting in growing brand recognition: RBL has created a customer-centric culture where it look to satisfy each client's complete banking needs by tailoring products and services as required for the client rather than become a product-focused organization. RBL use branches and technological and digital banking capabilities to develop and enhance knowledge of the customer requirements, industry sectors, businesses and local environments. Robust multi-channel distribution system: It offer services and products through a multi-channel distribution network comprised of 197 interconnected branches and 362 interconnected ATMs as of March 31, Its delivery channels also include internet banking, phone banking and mobile banking. It has developed a cost-effective micropayment and branchless banking solution by establishing points of collection and aggregation at over 32,000 transaction points to cover a larger geographical territory and customer base. RBL believes that extensive presence and variety of distribution channels increases ability to acquire and retain customers and enables to provide better service to existing customers Focus on operational quality and scalability: Increasing use of technology means that more and more customers interface with operational platforms making it increasingly important for to provide quality service across all customer touchpoints branches, ATMs, phone banking, internet banking and channels. It believes that consistent quality, competitive turnaround times and system reliability are core service differentiators. It is essential that all of these operations run with precision, skill and, in some cases simplicity, to ensure customer satisfaction. 1

2 Objects of the Issue The public issue comprises a fresh Issue and an offer for sale by the selling shareholders. Information in this section is taken from chittorgarh.com, India's No 1 IPO Investment Portal. 1. The Offer for Sale RBL Bank will not receive any proceeds from the Offer for Sale. 2. The Fresh Issue The proceeds from the fresh issue will be utilised towards the following objects: A. Augment capital base to meet Bank's future capital requirements ; B. Enhance their visibility and brand name among existing and potential customers.; C. General corporate purposes. Strategy Grow and leverage distribution network: RBL expects to continue expanding branch network over the next three years. While branch network was historically concentrated in the states of Maharashtra and Karnataka, RBL has now begun expansion to cover other important Indian states. It also focused expanding its network to cover states with higher per capita income and key economic centers. In rural areas, RBL looks to add branches in locations that complement and leverage agricultural & development banking partners and to build brand in rural communities. In addition, it plans to continue the expansion of branch network and partnership network further to extend the reach of branches through partner operated branches and transaction points. Introduce new products and services: RBL gather, analyze and continually improve knowledge of the customers' needs through the use of various technological initiatives to help analyze customer data and strengthen business intelligence system. It has also developed robust and agile processes to develop and bring new products to market quickly. These processes begin with risk management and include IT, operational and market testing. Pursuing partnerships and strategic initiatives: RBL strategy is to cultivate mutually beneficial partnerships to extend footprint beyond the reach offered by branch network. For instance, to develop AB and DB&FI businesses, it plans to continue entering into strategic partnerships (traditional or digital), including by way of strategic equity investments in partners, to extend reach in rural India where it is able to locate partners with strong local relationships that can benefit from product offering, technology and distribution network. Risk factor Any increase in RBI-mandated provisioning requirements could also affect business: Bank is making efforts to improve collections and to foreclose on existing impaired loans in a timely manner, there cannot be any assurance that it will be successful in efforts or that the overall quality of Bank's loan portfolio will not deteriorate in the future. Its ability to improve financial parameters and results of operations depends primarily upon ability to manage operations and react to competitive pressures effectively. If Bank is unsuccessful in controlling or reducing its impaired loans, any significant increase in impaired loans, or deterioration in the quality of the assets that Bank holds as security, could materially and adversely affect Bank's business, prospects and future financial performance. Its business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected: RBL continue to develop and implement a number of growth initiatives to become more competitive. In the past few years, RBL have rebranded the Bank, expanded products and services portfolio, scaled up core business of financial inclusion, agri-banking and SME verticals, as well as launched new premium banking vertical Insignia Preferred Banking to place HNI customers at the center of exclusivity and recognition. As part of growth strategy, it continue to transition from a traditional corporate-commercial relationship-led local bank to a mid-size bank with a diversified corporate, commercial and retail banking portfolio. Bank has experienced negative cash flows from operating activities: The Bank has experienced negative cash flows from operating activities and investing activities in recent fiscal years. In Fiscal 2014, 2015 and 2016, the Bank used Rs 9,22.03 crore, Rs crore and Rs crore in cash for operating activities, respectively, and Rs crore, Rs crore and Rs crore in cash for investing activities, respectively. Negative cash flows over extended periods, or significant negative cash flows in the short term, could materially impact ability to operate its business and implement growth plans. A prolonged downturn in the real estate market could result in losses and adversely affect profitability: As of March 31, 2016, Its exposure to the real estate sector amounted to Rs crore, representing 7.08% of gross credit portfolio. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. The recent economic slowdown in India has adversely affected real estate market values 2

3 Peer comparison across India and values may continue to decline Having to provide for or write off bad debts and to engage in litigation for recovery may impact business, cash flows and results of operations: The Bank had provided for an amount of Rs crore during the fiscal year ended March 31, 2016 towards provision for NPA, non-performing investments, depreciation on investments, write-off and sacrifice for restructured advances. Bank initiate legal proceedings for recovery of amounts outstanding and conduct recovery drives in each of branches, through compromise settlements and lok adalats. Having to write off any significant amounts of bad debts and to invest significant management time and resources in litigation for recovery may materially impact business, cash flows and results of operations. Require a number of regulatory approvals for operation or growth of business: Require a number of regulatory approvals, licenses, registrations and permissions for operating business, including those at a corporate level as well as at the level of each of branches. Many of these approvals are required to be renewed from time to time. While it is believed that currently have or have applied for all material approvals required for business, or may not receive, all necessary approvals, or be able to obtain renewals of all approvals within the time frames anticipated by bank or may not obtain the same at all, which could adversely affect business. Industry Overview The weakening domestic macroeconomic conditions combined with continuing subdued global growth and its increasing spillover risks posed challenges to the banking sector during the year On the regulatory and supervisory policy front, the envisaged move towards risk-based supervision, initiatives for improved cross-border supervision and cooperation and enhanced oversight of financial conglomerates became important. In the short-term, the stress on banks' asset quality remains a major challenge. The credit quality of banks has deteriorated over the last few years. Gross NPAs increased from 2.4% of gross advances in March 2011 to 4.4% in December 2013, before declining to 4.1% in March Yet, it increases from 4.1% in March 2014 to 5.4% in September Net NPAs showed similar trends and increased from 2.2% in March 2014 to 2.5% in September Banks need to capitalize on these and play a major role in supporting economic activity and meeting the financial needs of all the sections of society. (Sources: RBI's Report on Trend and Progress of Banking in India, ; RBI's Annual Report, ; RBI's Financial Stability Report (Including Trend and Progress of Banking in India, ) Issue No. 10, December 2014) In 2015, Moody's Investors Service has changed its outlook for India's banking system from negative to stable because of the gradual improvement in the operating environment for Indian banks. Further, for the Indian economy and the Indian banking industry, the outlook for growth is improving gradually with a sense of optimism stemming from the Government of India's measures to revitalize industry growth and the RBI's new measures to restructure the domestic banking industry. (Source: RBI's Annual Report, ). Co_Name PBIDT PAT EPS P/E P/BV BV FV Price Mcap City Union Bank DCB Bank IndusInd Bank Kotak Mah. Bank Yes Bank RBL Bank Valuation Considering the P/E valuation on the upper end of the price band of Rs. 225, the stock is priced at pre issue P/E of 25.23x on its FY16 EPS of Rs Post issue, the stock is priced at a P/E of x on its EPS of Rs Looking at the P/B ratio at Rs. 225 the stock is priced at P/B ratio of 2.51x on the pre issue book value of Rs and on the post issue book value of Rs the P/B comes out to 2.10x. On the lower end of the price band of Rs.224 the stock is priced at pre issue P/E of 25.12x on its FY16 EPS of Rs Post issue, the stock is priced at a P/E of 28.81x on its EPS of Rs Looking at the P/B ratio at Rs. 224, the stock is priced at P/B ratio of 2.49x on the pre issue book value of Rs and on the post issue book value of Rs , the P/B comes out to 2.09x. 3

4 Outlook The bank has been consisting delivering on improving asset quality, cost efficiency and other income since last 4-5 years. Consistent rise in non-performing assets hit balance sheets of banks but it is maintaining its capital requirements under the Basel III Requirements as per the RBI's new capital adequacy guidelines. Moreover, Its provision coverage ratio is improving as well as restructured loans percentage are reducing year on year basis, which is showing that bank has been able to maintain asset quality. NPA is slightly on the higher side due to RBI's clean up balance sheet action, but management of the bank is confident to reduce that to best in the industry. Thus, investors who have long term aspect could opt for the issue. 4

5 Annexure Profit & Loss ` in Cr. Particulars 31-Mar Mar-15 Total Operating Income Total expenditure Operating Profit OPM% Other Income PBDIT Depreciation PBIT Provisions & cont, PBT Tax PAT adjustment for appropriation Balance Sheet Particulars 31/03/ Mar-15 Non-current assets Fixed assets Non-current investments 14, , Long-term loans and advances 21, , other non current assets Deffered Tax Assets Total Non- Current Assets Current assets Cash in hand Balance with RBI Money at call and short notice Balance with banks Short-term loans and advances Other current assets Total current assets Total Assets ` in Cr. Non-current liabilities Deposits saving deposits Deposits Current liabilities term deposits from banks term deposits from others Borrowings other liabilities and provisions Total current liabilities Total NET Worth Net worth represented by: Share capital Reserves and surplus Net Worth

6 RANKING METHODOLOGY WEAK NEUTRAL FAIR GOOD EXCELLENT SMC Research Desk SMC Research also available on Reuters Corporate Office: 11/6B, Shanti Chamber, Pusa Road, New Delhi Tel: Mumbai Office: Dheeraj Sagar, 1st Floor, Opp. Goregaon sports club, link road Malad (West), Mumbai Tel: , Fax: Kolkata Office: 18, Rabindra Sarani, "Poddar Court", Gate No. 4, 4th Floor, Kolkata Tel: , Fax: SMC Global Securities Limited is a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number INH SMC Global Securities Limited or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market. SMC or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. SMC or its associates and relatives does not have any material conflict of interest. SMC or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. The subject company has not been a client of SMC during the past twelve months. SMC or its associates has not received any compensation or other benefits from the company covered by analyst or third party in connection with the research report. The Analyst has not served as an officer, director or employee of company covered by Analyst and SMC has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly available/internal data/ other reliable sources believed to be true. SMC does not represent/ provide any warranty express or implied to the accuracy, contents or views expressed herein and investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. SMC Global Securities Limited is proposing, subject to receipt of requisite approvals, market conditions and other considerations, a further public offering of its equity shares and has filed the Draft Red Herring Prospectus with the Securities and Exchange Board of India ( SEBI ) and the Stock Exchanges. The Draft Red Herring Prospectus is available on the website of SEBI at and on the websites of the Book Running Lead Manager i.e., ICICI Securities Limited at and the Co- Book Running Lead Manager i.e., Elara Capital (India) Private Limited at Investors should note that investment in equity shares involves a high degree of risk and for details relating to the same, please see the section titled Risk Factors of the aforementioned offer document. DISCLAMIER: This report is for the personal information of the authorized recipient and doesn't construe to be any investment, legal or taxation advice to you. It is only for private circulation and use.the report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. No action is solicited on the basis of the contents of the report. The report should not be reproduced or redistributed to any other person(s)in any form without prior written permission of the SMC. The contents of this material are general and are neither comprehensive nor inclusive. Neither SMC nor any of its affiliates, associates, representatives, directors or employees shall be responsible for any loss or damage that may arise to any person due to any action taken on the basis of this report. It does not constitute personal recommendations or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/s. All investments involve risk and past performance doesn't guarantee future results. The value of, and income from investments may vary because of the changes in the macro and micro factors given at a certain period of time. The person should use his/her own judgment while taking investment decisions. Please note that we and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance if this material;(a) from time to time, may have long or short positions in, and buy or sell the commodities thereof, mentioned here in or (b) be engaged in any other transaction involving such commodities and earn brokerage or other compensation or act as a market maker in the commodities discussed herein (c) may have any other potential conflict of interest with respect to any recommendation and related information and opinions. All disputes shall be subject to the exclusive jurisdiction of Delhi High court.